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What the Rich Don't Tell You About Making Money

Updated: Jul 13, 2023



You’ve heard these money-saving tips before, right? Max out your IRA. Open a high yield savings account. Cut Starbucks out of your budget.


Advice such as this continues to circle its way around water coolers across the country.


And in general, I agree with most of it: saving money on over-priced coffee and earning more on your cash are both good pieces of advice.


What's lacking, however is context.


Yes, earning 4% on your cash is better than earning 1%. But if your savings account has a balance of $5,000, that additional $150 of interest earned each year isn't going to make, or keep you wealthy.


Neither is saving $40 each month on Caramel Frappuccinos or a few hundred dollars in taxes from an IRA contribution.



This sort of financial advice works better as a catchy headline than a sound wealth creating tool.


The focus instead should be on what the wealthy do, not always what they say.


I've spent most of my career analyzing, studying and employing the strategies my wealthy, successful clients have used to achieve financial success.


Here are three pieces of financial advice I’ve found most effective that you won’t hear around the water cooler, and that wealthy people may not readily share with you.


1. Build healthy money habits vs. making a single transaction



Let's take the first money tip I mentioned above: maxing out your IRA.


What is the value of contributing $7,000 to an Individual Retirement Account?


From a tax perspective, it's simply the number of dollars saved multiplied by your tax rate. Over time, the value compounds depending on how the funds are invested and how much money is added each year.


The greater value, however is in developing a consistent habit of saving regardless of account type.


In his book Atomic Habits, author James Clear illustrates the power of building and maintaining positive habits through small, incremental changes made every day. Clear writes: "1% of personal improvement each day means you'll be 37 times better this time next year."


This sounds easy enough on paper but in practice is much more difficult. The reason is that most people are impatient. They want a quick fix and direct their attention towards the end goal without concentrating on what's needed to effectively achieve that goal.


That's why gyms are packed the first few weeks in January and nearly empty 30 days later.


And why $105 billion was spent on lottery tickets in 2021, yet 42% of Americans have less than $1,000 in savings.


Instead of going from 0 to 100 mph, i.e., not saving at all to making a one-time transfer to an IRA, start with making a habit of saving a small percentage of your income each week into a money market account for no other reason than to save.


Next, increase that percentage. What started as a 1% savings rate can quickly turn into 20, 30 or even 40%.


For perspective, consider a married couple earning an annual income of $200,000 who've built the habit of saving over time and are now are putting away 40% of their earnings, or $80,000. With a modest 6% growth rate, that $80,000 would be worth nearly $1 million dollars in nine years.


Later, expand upon the savings habit by gaining knowledge on the types of savings accounts and learning the benefits of funding a Roth IRA, an HSA or a 529-plan.


Remember, we're running a marathon here, not a sprint.


Over time, the habit (saving money consistently) will yield a much higher return than a single tactic (maxing an IRA).


2. Apply wealth building AND wealth management strategies



Everyone wants to be wealthy.


To some, that means shopping at Costco without regard for sticker price. Others value travel and experiences with loved ones above yachts and mansions.


In the end, we're all striving for the same thing: freedom.


Freedom to do what we want, when we want, with whom we want.


That being said the question then becomes, "how do we get there?"


Investing in index funds? Making Folgers coffee instead of buying Starbucks? Crypto?


Before going down this rabbit hole, you first need understand that creating wealth and maintaining it require different skillsets.


Just ask Jesse Livermore, one of the greatest traders of all time. Livermore made his fortune in the late 1920s betting against the stock market right before the Great Depression. He became an instant millionaire.


Fast forward four years, Livermore had taken his own life and lost his entire fortune.


As author Morgan Housel writes in his book The Psychology of Money, "Getting money is one thing; keeping it is another."


The financial media rarely distinguishes between the two so in order to help grasp this concept better, here are some examples for building then managing wealth:


How to build your wealth



Save as large of a percentage of your income as you're able - See my example in the previous section. The amount you save (and the habit of saving) has a bigger impact on wealth creation than almost anything else.


Maximize your earning potential - The personal finance community spends too much time and attention on defense, i.e. trying to finding creative ways to help people cut costs and not enough on offense. Negotiating a higher salary, changing career paths, acquiring a new skill you can monetize, increasing your sales. These are just some examples of how you can enhance your earning potential by going on the offense.


Take calculated risk - Let's face it, it's better to achieve financial freedom sooner in life than later. Those who want a quicker path will have to take a higher degree of risk with their savings (i.e., starting a business) than those willing to wait (contributing to a 401k and investing in index funds). Know where you stand on the risk spectrum and adjust your wealth building strategy accordingly.


Reduce taxes - It's not about what you make but what you keep. The way the tax code is currently written, the more you make, the less you keep. Thankfully, there are a variety of ways to save money on taxes from contributing to tax-deferred retirement accounts (i.e. IRA, 401k), investing in privately-owned businesses, and taking advantage of tax credits where applicable.


Control your budget - If you want to spend $100 per month at Starbucks, go for it! Just be sure you can comfortably afford to while still saving a large percentage of your income. This requires a thorough understanding of your budget so you can better control where you spend your hard-earned dollars. Consider the popularized 50/30/20 rule but modified slightly: 50% of net income towards savings, 30% on essential living expenses and 20% for discretionary spending, i.e. 10 Venti Cafe Mochas each month.


How to manage your wealth



Manage risk - Your risk tolerance will likely change once you're forced to rely on savings to fund living expenses. Make sure your investments are diversified, plan for future cash flows, invest for income and growth, and expect the unexpected and are all critical risk management tools to help you maintain your wealth. If you're unsure where you stand, hire an expert.


Control your budget - The 50/30/20 rule noted above will probably need to me modified as saving may no longer be an option. What's more important is to adjust your spend around what you value most (i.e., travel, new car every four years) while cutting in other areas that don't matter as much (i.e., expensive coffee, clothes, eating out).


Reduce taxes - Again, this is one that works both for building and managing wealth. While some of the strategies are the same for those focused on growing wealth, other strategies apply more to those who've already attained it, i.e., donating to charities, establishing trusts, asset location of investments and rental real estate to name a few.


Compare and despair - Did you know Bernie Madoff was a millionaire before he stole billions from innocent investors? The reason...he wanted more. More houses, nicer cars, faster boats, the best of everything. That endless desire to keep up with the Joneses can cause already wealthy people to do really foolish things. Maintaining wealth means being happy with what you have. It's knowing when you've won, being satisfied with that you've accomplished and preserving that wealth, not risking it.


Know when to outsource - This section is the longest for a reason and why there's an entire industry built around helping people build and manage their wealth. Successful CEOs from small manufacturing companies to large Fortune 500 behemoths all have one thing in common: they know when to outsource. That's why they employ CFOs to run the finances, COOs to handle operations and CMOs to oversee marketing. They understand where their time is best spent and happily pay experts to handle the rest.


The same goes for you and your wealth. If you don't feel comfortable going it alone, don't have the knowledge or expertise in investing and finance, or simply don't want to spend your time dealing with any of it, outsource to someone you trust to manage for you.


3. Learn to monetize your time



Currently, Elon Musk ranks as the 2nd wealthiest person in the world worth over $180 billion. His recent $40 billion purchase of Twitter could go bankrupt tomorrow and he'd still be one of the 10 richest people on earth. He has enough money to buy almost anything he wants 100 times over, except for one thing...more time.


How much would you pay for three extra hours of time? How about 24 hours? A week? A year?


Since time is the most valuable finite resource on the planet, the answer should be somewhere in the gazillions of dollars!


The reality is, sometimes time is wasted frivolously and other times cherished graciously.


The wealthy understand this concept and accordingly place a high watermark on their time and use that value to make intelligent financial decisions.


Consider this advice from Jim Cramer for someone with $10,000 looking to invest. Cramer advises this person consider investing the full $10,000 in an S&P index fund. Assuming a 10% average annual rate of return, the investment would be worth $450,000 in 40 years. Not bad, right?


What about that last piece of data: 40 years.



That may sit well for someone in their teens, but what about a 35 year-old investor? With the average life expectancy in the US down to around 76, that means this person would have the luxury of enjoying that $450,000 for 365 days. Still sound like a good deal?


Much depends on how this person spends their time during those 40 years, right?


As of September 2022, there were approximately 33.2 million businesses in the US and $163.5 million employees. Clearly, way more employees than business owners. Accordingly, I would have to assume this hypothetical 35-year-old is an employee earning the median salary in 2022 of $54,132 and making the same investment week after week: trading five for two. That is, giving up five days of their time (Mon. - Fri.) in return for two (Sat. & Sun.).


How does the $450,000 in 40 years deal sound now?


Let's look at another example of how to analyze the value of time: negotiating a deal.


True story. I was reviewing a loan agreement a few years back that was, in my opinion, fair with a reasonable rate and term. However, I decided to spend a little time reading the fine print to ensure I didn't miss anything critical. Sure enough, I spotted origination fees of $350.


Next, I called the banker thanking her for the proposal and said I was in agreement with the terms as long as she could waive the $350 in fees. She agreed, and we moved on from there.


Reading through the loan agreement and speaking to the banker took a total of 25 minutes. For that 25 minutes, my return was $350. Put another way, I was paid a rate of $840/hr. for my time. With 2,050 working hours in a year, that equates to an annual salary of $1.7 million.



Had this taken me hours to uncover and negotiate back and forth with the banker, I'd likely have made a bad time investment.


The point is, the wealthy are keenly aware of how valuable their time is and know where it's best spent, and where it pays to outsource.


Should you pay an attorney $3,000 to draft a trust agreement or spend time doing it on your own? That may seem expensive, but what's the cost of your time? If the attorney's work will end up saving you two hours and $10,000 in inheritance tax, that's a 233% return on your money. I'll take that deal any day of the week!


Where To Go From Here



The next time you hear someone on TV tell you to buy Treasuries or make a backdoor Roth contribution, remember to pay close attention to the context of the advice being offered. In most cases, financial media outlets target the masses with their content, not necessarily wealthy investors, or you specifically for that matter.


In reality, you're better off spending 15-minutes reading the wikipedia page of Jim Cramer or Suzie Orman instead of following their stock picks. What you'll find is both Cramer and Orman achieved success and maintained their wealth not by funding an IRA or buying index funds alone, but by investing in themselves, acquiring new skills, taking risks, starting businesses and saving a lot of their income.


Focus on what the wealthy do, not always what they say. Then, make the necessary adjustments based on what works for you and your definition of wealth.


You may not be comfortable taking entrepreneurial risks and define a wealthy life as being debt-free and waking up every morning with complete control over your day. Others might want to achieve financial freedom sooner than later and be open to taking a more aggressive approach with their investment strategy.


No matter your path, be sure you're creating healthy money habits, using wealth building and wealth management strategies and learning to monetize your time. If you don't know how or need some help, don't be afraid to outsource to an expert.

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